‘Ability to support risk assets vital to banks’survival’

THE ability to support risk-as-set creation in the real sector will differentiate winners from losers in the banking industry over the next three years, a report by the leading research houses in Nigeria, Coronation Research has said.

The firm, a part of Coronation Merchant Bank Group, said while the quality of asset in the industry is improving, the best-capitalised banks will move well ahead of their competitors.

According to the firm’s Head of Research, Guy Czartoryski, “for two years, Nigerian banks have had an easy time, earning good income on risk-free government-backed, Naira-denominated securities. That era is drawing to a close as T-bill rates fall. Asset yields are trending south, and it is almost impossible to re-price liabilities to match. So, banks must either find other sources of income or face an average 15 per cent drop in their Profits before Tax expectation for 2018. For the banks to replace the portion of income threatened by declining yields on securities, they must grow risk-weighted assets.This means a six-12 per cent rise in customer loans in 2018.”

The report categorises banks into three tiers: Group A, Group B and Group C. Banks in Group A, being the most well-capitalised, have the biggest opportunity to increase consumer lending. According to the report, Group A includes Zenith Bank, GT Bank and Stanbic IBTC, which have the ability to significantly expand their loan books by 69 per cent, 82 per cent and 182 per cent. Group B, including UBA, Access Bank and Fidelity Bank, have moderate capital levels and some ability to expand loans books but may also pursue tier II capital raise in the form of long-term subordinated debt. Group C, including FBNH, Diamond Bank and Sterling Bank, in the short- to medium-term have limited ability to expand their loans books and will most likely focus on dealing with capital issues and might attempt to raise long term capital from the capital market.

According to Coronation Research, “if equity markets are sufficiently strong, some banks might attempt equity capital increases (Tier-I) this year. However, we have market valuations so low as to make equity capital dilute the interest of existing shareholders. So, the preferred capital-raising route is likely to be long-term subordinated debt (Tier-II). We expect market share in customer lending to flow from banks in Group C towards those in Group A. With banks in Group B, we see some, but perhaps not significant, market share gains”.